Egypt’s political transition has prompted one of the country’s leading investment banks to revise its short-term strategy in anticipation of economic slowdown and possible stagflation.
Pharos Holding predicts volatility will last until blueprints for political reform are translated into concrete action and suggests investors attempt a ‘tactical shift’ towards money market funds and, within equities, late cycle and ex-Egypt plays. While advising short-term caution, it adds that successful democratic reforms may herald long-term gains.
“We are very concerned over the short-term,” says Hani Genena, co-head of research at Pharos, who describes the current situation as "one of the worst scenarios" and believes the next six months of military rule before mooted democratic elections will be "boom or bust – there is no middle ground."
Having foreseen a cyclical economic recovery back in December, Pharos now views the rally in global depositary receipts up to 15 February as reflective of the reduced chances of economic meltdown rather than a sign of full-fledged recovery.
Short-term portfolio allocation will be shaped by a range of factors. Among those cited by Pharos are reduced business and consumer confidence, tight liquidity, high energy and commodity prices and a weakened Egyptian Pound versus the Dollar.
It also believes investors will be guided by the survival of industry leaders with low operating and financial leverage and will pay greater attention to shareholder structures and regulatory risks.
Telecoms, banks and consumer staples are cited as the most promising sectors for investors from an operational and financial perspective. Steel and real estate are least preferred, with property developers warned of ‘a hard time’ ahead, particularly in the secondary and holiday homes market. “In times of crisis, we advise investors to choose chattel - things people would buy anyway regardless of the situation,” says Genena.
Pharos has also expressed concern about the industrial sector in the aftermath of the upheaval due to poor earnings visibility, an expected slowdown in domestic demand and the likelihood of currency depreciation.
The longer-term outlook, though, remains hostage to the broader political picture. The report concludes: “We believe that a successful transition to a democratic state could trigger a steep recovery in both economic activity and the equity market over the medium-term. In this case, we expect banks and durables to lead the rally.”
Pharos predicts a favourable political outcome will trigger mass inflows of foreign aid and foreign direct investment. “There is pent-up demand, many Arabs investors are interested and the money is out there,” says Genena. “They are just waiting to see what the military does.”